Performance and Breach - Module 4 of 8

Module 4: Performance and Breach

Tender and Payment

In every sale covered by the UCC, it is the seller’s obligation to sell and deliver the goods and the buyer’s obligation to accept and pay for the goods.[1] The Code provides default rules that act as gap-fillers that aid in the interpretation of a contract, but they can be changed by the parties under the Code’s deference to the freedom of contract. The Code anticipates that there will be one delivery of goods, called “one-shot” delivery,[2] although the seller may divide the delivery into multiple shipments if it is commercially reasonable to do so.

Delivering the goods is called making a “tender of delivery” while making payment is called making a “tender of payment.” Each of these tenders, delivery and payment, are concurrent conditions, which means they are each conditions of the other’s responsibility. In other words, there can be no duty of delivery without payment and no duty of payment without delivery.[3] Because it’s impossible to have a truly simultaneous exchange, the Code establishes default rules for who must perform when in the course of a sales transaction.

The Code requires that the goods conform to the contract’s requirements, which means they must conform to the time and manner of delivery, as well as the express and implied warranties of quality.[4] The Code further provides default rules for the place, time and manner aspects of delivery if the contract does not specify those terms. If the goods are not forthcoming, then the buyer may reject them without incurring a payment obligation. The Code requires that the seller put the goods at the buyer’s disposition and properly notify the buyer that the goods are ready for delivery. The Code assumes that tender of delivery is at the seller’s residence or business at a reasonable hour and for a reasonable time to allow the buyer to take possession.[5] The buyer must provide reasonable facilities if the seller is delivering the goods.

Often, the parties to a contract for goods will designate a carrier to deliver the goods, such as UPS or FedEx. The Code provides for two types of contracts: shipment contracts and destination contracts.[6] In a shipment contract the seller must merely provide conforming goods to the carrier, at which time the risk of loss passes to the buyer. In a destination contract, the seller retains responsibility for anything that goes wrong until the goods reach the purchaser. Note that the terminology can be confusing because a “shipment” contract will have a specified destination, but that does not make it a “destination” contract.

While the buyer assumes the risk of loss in a shipment contract, this does not mean the seller has no obligations. Merely delivering the goods to a carrier is not enough as the Code imposes several obligations on the seller.[7] The seller must arrange for shipment of the goods and notify the buyer of the shipment. She also must deliver to the buyer any shipping documents that would enable the buyer to take possession of the goods. Given the widespread use of shipment contracts, industry-specific terms and practices can aid in the interpretation of the shipping aspects of a contract under the Code’s gap-filling provisions and course of performance, course of dealing and usage of trade. It is also possible for goods to be delivered without physical movement. The seller may deliver to the buyer a document of title that transfers ownership of the goods to the buyer while leaving it in its current location. Alternatively, the goods may be held by a third party, called a “bailee,” pending pickup by the buyer.[8]

Payment may be made in any manner agreed to by the parties. If not specified, it may be made in any manner consistent with the ordinary course of business.[9] The seller must give the buyer reasonable time to make payment if the seller demands payment in legal tender, which means cash. If paying by check, the buyer’s continued claim to any goods is contingent on the buyer’s bank honoring the check. If the buyer’s check is dishonored, then the buyer is in breach of the payment obligation of the agreement.

The buyer has the right to refuse to accept or pay for nonconforming goods.[10] Nonconforming goods are goods that do not satisfy the time and manner of delivery or violate an express or implied warranty under the contract. To assist the buyer with making that determination, the Code entitles the buyer to inspect the goods. Unless otherwise agreed, the buyer may inspect the goods at a reasonable place or time in a reasonable manner. Once the buyer has inspected the goods, payment is then due. If a buyer agrees to what is called “payment against title,” then the buyer must pay before inspecting the goods.[11] This provision does not, though, waive the buyer’s right to a claim against the seller if the goods are non-conforming. An exception to the buyer’s agreement to pay applies if the goods are self-evidently non-conforming without need for an inspection.[12]

Acceptance and Rejection

The seller must tender conforming goods and this provision is what the Code calls “the perfect tender rule.”[13] Note that the goods need not be “perfect” in a strict sense, but they must conform to the contract.[14] If a buyer rejects tendered goods, he must do so in good faith and not use a minor anomaly or defect to serve as a pretext to escape his obligation to pay. The buyer must reject the goods and timely notify the seller of his objection before acceptance.[15] The reasonableness of the rejection is viewed in light of the types of goods involved, such as whether they are perishable, and the degree to which the price of the goods fluctuates in the market.[16] The buyer must be afforded a reasonable time to inspect the goods before acceptance.

A buyer may accept goods in several ways.[17] A buyer may accept goods as conforming or may accept goods even though they are non-conforming. A buyer’s acceptance may be by words or conduct, such as a signature on a seller’s order form. Alternatively, a buyer may improperly reject the goods, which means the rejection is ineffective. If, for example, the buyer discovers that the goods are non-conforming but waits an unreasonable amount of time to make an objection, he will have waived his right to reject the goods. A buyer may also demonstrate behavior consistent with ownership of the goods, such as using a car after objecting to its shipment. A buyer who continues to use non-conforming goods may be liable for a reasonable amount of compensation to the seller even if the goods are eventually properly rejected.

The buyer should inform the seller of a defect rendering goods non-conforming when the seller has a right to cure and the defects are curable.[18] Failure to do so will preclude the buyer from using the defect as justification to reject the goods. If the contract is between merchants, the seller may request a record of all the defects upon which the buyer is relying to justify rejection. If the buyer fails to properly state the defects of goods alleged to be non-conforming after receiving the seller’s request, the buyer is precluded from rejecting the goods.[19]

The seller has a right to cure a non-conforming shipment either when the buyer rejects the goods or when the buyer revokes acceptance.[20] Minor deviations in the goods customary in the usage of trade do not trigger an obligation to cure the shipment. It is the seller’s obligation to timely notify the buyer of the intention to exercise the right to cure.The seller has not rectified in a timely manner, though, if the buyer has arranged for the procurement of substitute goods. The seller must act in good faith and tender a conforming shipment when exercising the right to cure. If the seller does not cure, he has breached the contract.[21]

Revocation

The issue of revocation of an acceptance involves the question of whether the buyer can return the goods even after they have been accepted.The buyer may do so if the goods are non-conforming to the extent that the defects substantially impair the value of the goods to the buyer.[22] The Code requires that the buyer had a reasonable expectation that the seller was going to cure the non-conformity, but the seller did not do so. “Cure” means the seller would fix the goods or offer alternative conforming goods. Also, the buyer must have been unaware of the defect in the goods at the time of acceptance and the seller must have induced the buyer to miss the defect or the defect must have been undiscoverable at the time of the acceptance.[23]

Revocation of acceptance, when allowed, must occur before there is any substantial change to the goods and the buyer must notify the seller of the non-conforming nature of the goods. If the buyer uses the goods in a manner consistent with ownership and inconsistent with the seller’s ownership, then the buyer’s revocation right might not be effective, or the buyer’s use may be deemed a “re-acceptance” of the goods. Conversely, the buyer might have a commercially reasonable need to make use of the goods after rejection which would not invalidate the buyer’s right to reject the goods.[24]

For example, assume Biscayne Real Estate has several offices throughout South Florida and purchases several air conditioning units from Intercoastal Climate Control Systems in April. The compressors in almost all the units intermittently overheat after a couple of hours and shut down. Biscayne notifies Intercoastal of the issue and Intercoastal agrees to send replacement units in October. The heat index where Biscayne’s offices are located typically exceeds one hundred degrees every day in the summer, so it uses the air conditioners anyway to try to mitigate the oppressive heat while waiting for the replacement units. Intercoastal would likely not be able to claim Biscayne accepted the units by using them because Biscayne gave them appropriate notice and the use was commercially reasonable and expected under the circumstances.

Anticipatory Repudiation

When a party indicates that it will not fulfill its obligations under a contract, the party is said to have repudiated the contract. A repudiation is typically tantamount to a breach of contract.[25] If the repudiation substantially impairs the value of the contract then the non-breaching, aggrieved party may institute a suit for breach of contract.The aggrieved party need not await the date on which the performance was to have taken place, rather he may immediately seek remedies for breach. The aggrieved party may also suspend performance or continue with performance to try to minimize any loss. It is the aggrieved party’s choice. Of course, making sure the party actually did repudiate is critical because, otherwise, the non-repudiating party could prematurely breach an agreement if a court finds there was not actual repudiation.[26]

A repudiating party may retract its repudiation unless the other party relied on the repudiation to its detriment.[27] If the repudiation is retracted on time, the contract duties of performance are back on, as though there had never been a repudiation.

If a party has reasonable cause to believe that the other party might seek repudiation (for example, if the other party is insolvent, declares bankruptcy or engages in conduct inconsistent with the agreement), then that party may deem itself insecure, which means the party reasonably believes that performance of the contract may be jeopardized.[28] The insecure party may demand “adequate assurances” from the other party that the contract will be performed. The assurances must be commercially reasonable under the circumstances, such as putting the purchase price into escrow, consigning some of the goods to a third party or some such arrangement. If the other party fails to provide the required assurances within a reasonable time, then the insecure party may treat the situation as one of repudiation.[29]

For example, Wilshire Furniture of Los Angeles orders several handmade rattan rocking chairs from Pacific Furniture company of Honolulu. Several of the workers with the needed skills left the company and Pacific indicated it would probably discontinue carrying the rockers as a product and would be unable to deliver the rockers that Wilshire ordered. Deeming itself insecure, Wilshire demands assurances from Pacific to fulfill Wilshire’s order for rockers. Exactly what would be commercially reasonable assurances is unclear but putting the purchase price into escrow or demonstrating that it is continuing to produce the chairs would probably qualify.

Excuse

The Code provides three situations where a party may be excused from performance or be allowed to substitute a different performance.[30] Shipping carriers or facilities may be substituted when there are exigent circumstances and the means and manner of payment may be substituted when there are changes in domestic or foreign government regulation that adversely affect the original means of payment. If the goods suffer loss before title passes to the buyer, there is no breach of contact. Instead, the buyer may deduct the amount of loss from the payment when the loss is partial. If the goods suffer a total loss, the contract is terminated.[31]

If an unforeseeable event renders performance impossible or so commercially unreasonable as to be tantamount to impossible under reasonable circumstances, then the performance is said to be impracticable and the parties are excused from performance.[32] Increased cost alone is rarely sufficient to escape liability.[33] The test of foreseeability is whether the adverse event could have been foreseen by the parties, not whether the event was actually was foreseen by the parties.[34]

In the event that a loss was foreseeable, the Code assumes that the parties could have guarded against it, and so the parties are not excused from performance. Moreover, a seller might not be afforded an impracticability defense if the seller does not notify the buyer of the delay or non-delivery in a timely fashion. Upon notice, the buyer may terminate the contract or agree to the seller’s proposed modification of the contract. If the buyer fails to agree to the seller’s proposed modification within thirty days of the seller’s notice, the contract is terminated.[35]

The Code provides for three unique types of contracts.[36] Installment contracts involve separate shipments of goods.[37] A buyer may reject an installment if that installment is non-conforming, but may not reject the whole shipment based on one non-conforming installment unless the breach impairs the value of the entire shipment. Note that this impairment standard replaces the “perfect tender” rule for shipments in multiple installments. A sale on approval contract is a contract where the buyer can return the goods to the seller even if they conform to the requirements of the contract.[38] The buyer’s use of the goods during a trial period does not mean that buyer has accepted the goods. In a sale or return contract, a buyer may similarly return the goods to the seller if the buyer cannot resell the goods in a predetermined time period.[39]